Why is the coronavirus crisis pushing loans towards crowdfunding?

The economic crisis generated by COVID-19 has not slowed down crowdfunding so far, i.e. lending to small and medium-sized enterprises (SMEs) by – mainly – small investors. This lending activity is carried out through dedicated online portals. In 2019, with $79.3 million (€73 million) represented more than 50% of the total Italian crowdfunding. Indeed, this lending market continues to grow, at least looking at the first quarterly data collected by the main operators. A significant point, given that the world is in the midst of an economic crisis and that for the coming months it is legitimate to expect a large demand for liquidity from Italian SMEs.

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The first data for 2020

According to October and Borsa del Credito, respectively the first and second peer to peer lending platforms for collection in 2019 (Starteed report data), the first quarter of the year ended positively. For October, the average increase in funding in the five European markets in which it operates (France, Italy, Spain, the Netherlands, and Germany) was 10% with +30% of projects to be financed, compared to the same period in 2019. While for Borsa del Credito, the company registered a more substantial growth of 30% in funding in Italy alone, with a peak of loans disbursed of about 50% in March alone.

“In March, we saw an acceleration in the requests for financing by SMEs, an unpredictable scenario only a few months ago – explained Antonio Lafiosca, director of operations of Borsa del Credito – Just think that in these first three months of 2020 we disbursed about $6.3 million (€5.8 million), with an average of $1.63 million (€1.5 million) in January and February, but with a total disbursement of over $3.26 million (€3 million) in the month of March.”

The lending platforms are therefore candidates to be an engine for the restart, a channel for SMEs that urgently need access to new liquidity, as explained by Sergio Zocchi, CEO of October: “It is undeniable that the economic and social crisis triggered by the pandemic has put the issue of access to credit for small and medium-sized enterprises back at the center of attention. We have put in place a series of initiatives to help client companies overcome the emergency. First, we announced the suspension for 3 months of capital repayments on active repayment plans, then we made it possible for existing loans to be refinanced through various forms of public or private guarantees. In these difficult times, digital realities like ours can make a significant contribution to speeding up SMEs’ access to credit.”

Watch out for indebtedness

The alarm is sounded by Alessandro Lerro, lawyer and president of the Italian Equity Crowdfunding Association (Aiec): “Access to new credit lines is necessary, but risky because in many sectors revenues have been zeroed out for weeks and the prospects for a recovery in sales are far below what was expected even just a few months ago. This means that many companies will have to resort to debt to pay off past debts. We risk, as a country system, finding ourselves with a lot of bad debts and companies in default within a few years.”

Lerro emphasized that “it would be better to focus on non-refundable contributions from the state. The European Commission has already provided for them within the Temporary framework, in paragraph 3.1, approved in March, but in Italy, there is only talk of loans. We need to put money into the system that will not have to be returned if we really want to help SMEs. The EU Commission allows us to do this up to $870,000 (€800,000) per company. Other countries, such as the United States, have already understood that the only solution is so-called helicopter money. Otherwise, we only dump the problem on future governments.”

The new trends

People are now on the run from financial products that are no longer as granitic as they used to be and that give very low or even negative returns. More and more savers are looking at lending as a possible outlet for their capital, perhaps by investing in a national company whose business model they easily understand.

Capital totaling at least $1,630 billion (€1,500 billion): this is the estimate of the money that Italians currently hold in their accounts, made in February 2020 by the National Association of Financial Advisors. Precisely in this scenario and despite the crisis, the lending crowdfunding linked to real estate is growing with great strength. After all, buying and selling a house is a concept accessible to everyone.

This is confirmed by Andrea Maurizio Gilardoni, founder of Rendimento etico, a real estate lending crowdfunding platform created only a year ago, but already a leader in the sector: “In the first quarter of 2020 we raised $5.65 million (€5.2 million) for real estate projects. Almost as much as we collected throughout 2019. Despite the emergency, there is great interest from small investors in the real estate market, a market that has not stopped so far and which, I believe, will start again strongly in the coming months. One example is the likely divestment of real estate assets by banks. The Cura Italia decree provides tax incentives for banks that will dispose of real estate, which for them now represents impaired loans. This means that they will be able to buy properties with strong discounts and then sell them on the market with good margins. In this sense and respecting the ethical limits that characterize my platform, real estate investment in lending crowdfunding will continue to be an excellent choice for millions of savers.”

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(Featured image by Tumisu via Pixabay)

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First published in WIRED.it, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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